HSE 24 - Recovering - Model Update - Positioning
All,
Please find our updated analysis here
HSE has proven to be a successful investment for us; the early execution of a debt restructuring meant our holding period was much shorter than we had expected. The new SSNs are trading at par and the PIKs at 52c/€. The upside is in the PIKs now; we see significant upside in this instrument, but it will take time. We said at the time that the level of debt that was equitized was too small, and we can see another recap happening in 2029, which will leave the company in the hands of its creditors. The need to deal with the overall capital structure will impair the refinance of the new SUNs. However, for now, HSE 24 is performing well and recovering from the pressure put on it by suppliers last year.
Investment Discussion
- We are taking off our 5.9% NAV position in HSE, which returned 48% in nine months. Our FRN position was swapped for a package of securities: a new SSN (54%), a HoldCo PIK (30%) and an equity participation note (stapled to the PIK).
- FV for the SSNs is Par, the PIKs/Equity participation is 76c/€. Together, this equates to a recovery of 77c/€ for the original SSN holders. Today’s valuation of the restructured securities equates to a 71c/€ recovery for those who held positions at the restructuring last year.
- There is limited upside in the SSNs, and the likely requirement of further restructuring in 2029 will constrain the ability to refinance the SSNs.
- The PIKS currently trade at 51c/€and we see a fair value of 77c/€. In the next year, we see 16 points of upside (PIKs trading at c10%) and 10 points of downside (back to the original trading levels post-restructuring). We may revisit the PIKs, but the small size will make a meaningful position difficult to build.
- We had expected to have to hold our position for two years as the owner would wait for the bond maturity to be looming, but restructuring happened in one quarter, leaving the owners in control.
- One of our concerns had been that Payables would be reduced as suppliers became concerned about restructuring, but this did not happen.
- We have tweaked our model slightly and put in a new valuation of the bonds
-With the €192m PIK accruing at 7.85% PA, we are not convinced that there is equity value in the business above the notes and PIK.
Key Conclusions:
- HSE 24 has an ageing customer profile as highlighted in the Background section. The same section highlights how the company is increasingly selling via online platforms to increase its reach.
- The Recent Trading section notes that higher jewellery sales are boosting revenue and profitability. Also, after completing the restructuring, working capital is settling down as suppliers get more comfortable. Providence and Management have played a key role in calming things.
- In our DCF and Recap Table sections, the SSNs are at 99 and are at FV. The PIK/Equity Participation is at 52c/€ whilst our FV here is 77c/€. For those who held the old SSNs into restructuring, we see fair value for the instruments they received at 77c/€ vs a current total value of 71c/€. The haul to 77c/€ will depend on the performance of the PIKs, and some may want to take the money and run. As our DCF section shows, unless HSE24 outperforms our forecast, a further Debt/Equity swap will be needed.
- From our Model Section, HSE24 can service its debt as it generates cash, but this is driven by restructured debts priced well beneath where the company should pay. We expect the same issues to assert themselves in 2029 when the new SSN matures.
- Industry Section: The TV shopping industry is in slow decline, but still has a customer base. Continuing to grow the online channels will be critical if HSE is to continue growing
Current Trading Q3 25
Q3 25 results continue to run ahead of our original modelling. Increased sales in Wellness and Jewellery are helping push revenue higher 3.7% YoY. Jewellery has the highest margins, and increased sales here helped boost EBITDA, which was up 11%. If the better jewellery performance doesn’t persist, we could see EBITDA performance flatten, but overall, 2025 will beat our model. We are encouraged by the migration from TV to E-commerce, which accounted for 48% of sales in the 9M 25 period (+3%). The long-term issue of active customer retention remains, and Q3 numbers were down 3% YoY. The pace of decline is slowing as HSE grows its customer additions. The new additions are crucial to eventually finding a buyer for the business. We had been concerned about working capital management pre-restructuring; 9M2025 saw an inflow from payables, but inventory saw outflows of €19m in the 9M period for jewellery stock. We expect some of that outflow to reverse in the FY 2025 accounts. There should be further improvements in 2026 as supplier concerns about the restructuring of debt in 2025 fade.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055